FAQ – Retirement Annuity

 [spoiler title=”1.  What is a retirement annuity?” style=”fancy”]A retirement annuity is a tax effective retirement investment vehicle for individuals. The primary target market is individuals who do not participate in an pension or provident fund.[/spoiler] [spoiler title=”2.  Who should consider using a retirement annuity?” style=”fancy”]Retirement annuities are appropriate for:
Self-employed people
Employees in organisations that do not provide a pension or provident fund
Employees who earn a significant amount of non-pensionable income and wish to increase their savings towards retirement
Retirement annuities can also be used to house the proceeds of your pension or provident fund when terminating your employment.[/spoiler] [spoiler title=”3.  What are the tax benefits of a retirement annuity” style=”fancy”]There are three tax benefits:
Contributions are tax deductible – up to a maximum of 15% of non-pensionable taxable income. If you contribute more, you may claim excess amounts in future tax years. You may also add your excess contributions to the tax-free portion of any lump sum you receive.
Investment returns are tax free – there is no income tax or capital gains tax on the investment return earned in a RA.
Benefits are taxed on a favourable basis – lump sum benefits are taxed on a sliding scale with a portion of the benefit tax free (see details under “What is the tax on your RA benefits?”).[/spoiler] [spoiler title=”4.  What is non-pensionable income?” style=”fancy”]Individuals may deduct up to 15% of their non-pensionable income as tax free contributions to a RA. The distinction between pensionable and non-pensionable income can be confusing, but it is important you understand this. Taxable investment income is always non-pensionable. The confusing part relates to your remuneration from employment.
Pensionable income is the income used by your employer to calculate your pension or provident fund contribution. This income will typically include any fixed remuneration (e.g. salary or wages) but may exclude variable amounts such as commissions, bonuses and overtime.
If you are a member of a pension or provident fund and all your remuneration (i.e.. your salary, commission, bonus and overtime) is pensionable, then none of your remuneration is non-pensionable.
If you are a member of a pension or provident fund and all your basic salary is pensionable but your commission and bonus is not pensionable, then you may claim 15% of your commission and bonus as a tax free deduction to a RA.
Non-pensionable income is your taxable income excluding (if any) your pensionable income, retirement fund lump sum benefits, assessed losses and capital gains.
If you are not a member of a pension or provident fund, all your remuneration is non-pensionable and you may claim 15% of your remuneration as a tax free deduction to a RA.[/spoiler] [spoiler title=”5.     How many retirement annuities can you take out?” style=”fancy”]You can invest in as many retirement annuities (RAs) as you wish, but the tax benefit is determined in aggregate, not in respect of each individual RA. In other words, the tax relief on contributions is limited to 15% of non-pensionable taxable income, irrespective of the number of RA memberships. And the tax-free lump sum portion may be claimed only once.[/spoiler] [spoiler title=”6.     When can you access your retirement annuity?” style=”fancy”]In general you can only access your RA at retirement. However, you can withdraw your full RA investment in cash if you emigrate or if your RA investment is less than R7 000.
You may retire and claim your benefit from the age of 55 onwards (unless you are in ill health, in which case you may claim earlier). You can take a maximum of 1/3rd of your investment as cash (plus any amounts invested not deducted for tax); with the balance you must purchase an approved compulsory annuity, which will pay you a pension for life.
If your benefit is R75 000 or less at retirement, you can elect to receive the full benefit as cash.[/spoiler] [spoiler title=”7.     How are your retirement annuity benefits taxed?” style=”fancy”]

Tax on lump sum benefits according to the following scale:

Tax Rate

Withdrawal Lump Sum

Retirement Lump sum

0% 0 – R22,500 0 – R315,000
18% R22,501 – R600,000 R315,001 – R630,000
27% R600,001 – R900,000 R630,000 – R945,000
36% R900,001+ R945,001+

Source: South African Revenue Service
Annuity payments are taxed as income, according to the personal income tax tables.

[/spoiler] [spoiler title=”8.     Can you stop contributing to your retirement annuity?” style=”fancy”]Yes. You can make your RA “paid-up”. This means you no longer pay monthly contributions; however you will stay invested until you retire. You may retire from age 55 onwards.
Be aware that if you make your current RA paid up, your service provider may claw back any unrecoverable broker commissions (plus accrued interest) from your investment balance. This should not, however, be a factor in your decision to make your current RA paid up or not, as your service provider will deduct the outstanding broker commissions anyway (either now or in the future).
[/spoiler] [spoiler title=”9.     Can you transfer your retirement annuity?” style=”fancy”]Yes, it is possible to transfer your retirement annuity from your present RA to another, if the rules of your present fund permit you to do so.
The rules of most investments allow you to transfer your investment to another RA fund at any time.[/spoiler] [spoiler title=”10.  Won’t you pay penalties when transferring your retirement annuity?” style=”fancy”]There may be a “penalty” if you transfer your retirement annuity (RA). These penalties represent a claw back of unrecovered broker commissions and costs. This should not, however, be a factor in your decision to transfer as your existing RA will deduct these unrecoverable commissions and costs anyway, either now when you transfer or in the future, over the remaining life of your RA.
[/spoiler] [spoiler title=”11.  What happens in the event of a member’s death?” style=”fancy”]In line with section 37 of the Pension Funds Act, the trustees of the retirement fund will distribute the proceeds, considering first the needs of your dependents and then the beneficiaries listed in your nomination form. It is thus important to fill in and update your nomination form annually. Your investment will be taxed on the same basis as on retirement.[/spoiler] [spoiler title=”12.  Can my employer contribute to a retirement annuity on my behalf?” style=”fancy”]Yes. In the past, the main draw-back of a retirement annuity was that contributions made by an employer on behalf of employees were taxed in the employees’ hands. Such employees were thus prejudiced relative to members of pension and provident funds, as well as persons contributing directly to an RA. The employer can now deduct these contributions from employees’ pay. The deduction is (effectively) limited to 15% of the remuneration received during the year from non-pensionable remuneration.[/spoiler] [spoiler title=”13.  Should you consider a retirement annuity ahead of a pension or provident fund?” style=”fancy”]In general, pension or provident funds offer significant advantages over retirement annuities in terms of increased flexibility (investors can access their savings before retirement), lower costs, group life cover and no surrender penalties.[/spoiler] [spoiler title=”14.  Should you transfer the proceeds from your employer’s retirement fund to a retirement annuity or preservation fund?” style=”fancy”]A preservation fund is a type of pension fund that enables investors to preserve their withdrawal benefits until retirement age. There are four differences between a retirement annuity (RA) and a preservation fund:
Monthly ongoing contribution: with a RA you can contribute on a regular basis, but not with a preservation fund. Your preservation fund will only accept transfers from other funds.
Withdrawal benefit before retirement: you cannot withdraw your benefits from an RA (unless you emigrate) before retirement (the minimum retirement age is 55). You can make one full or partial withdrawal from your preservation fund at any time before retirement.
Retirement benefits: you can elect to receive the entire benefit as cash if you are member of a provident preservation fund, but you can elect to receive only one-thirds as cash if you are a member of a RA or pension preservation fund (you must buy an annuity with the other two-thirds).
Costs: the cost of investing with a preservation fund is generally lower than with a RA.[/spoiler] [spoiler title=”Ask a question” style=”fancy”]Click Here to ask a question.[/spoiler]